Thursday, February 27, 2014

Well the IBM 2013 10K is out, and it kicks off with what can only be described as a
180-degree turn in the way the company presents itself to the public.

As we pointed out here and here, IBM has spent
the last five years presenting itself to the public as a
shareholder-friendly—indeed, shareholder-obsessed—dividend-and-buyback machine
that prided itself on jacking up margins (both gross and net) by swapping in
and out of business lines,“rebalancing” its workforce (i.e. layoffs), and avoiding the taxman however (and wherever—e.g.
The Netherlands) the laws allowed it to.

But that was last year.

This
year, it seems, IBM is a new company.

Gone from the “Strategy” declaration in the opening pages of the 2013 10K is the previous year’s braggadocio about “sustained
earnings per share growth and strong cash generation” on the backs of customers
whose main role seemed to be to hand cash to IBM in return for the pleasure of
watching IBM’s stock price rise on the strength of ever-increasing EPS, thanks mainly to share
repurchases from all that cash.

In its place is a new “purpose,” which, we are
told with a straight face, is “making our company essential to clients,
employees, partners, investors and communities.”

(Note to Wall Street: you no longer rank first
on IBM’s list of pals—you now rank fourth.)

Lest readers think we are
making up this 180 turn in the infamous IBM “Roadmap,” we provide below the deletion (in red type) from the “Strategy” discussion in Part 1, Item 1, of IBM’s 2012 10K, followed by its replacement (in green type) in IBM’s newly released 2013 10K. (Both thanks to the indispensable StreetEvents
“Daily Delta” service.)

Old IBM:

New IBM:

Meet the new IBM—way different than the old IBM!

Jeff Matthews

Author “Secrets in Plain
Sight: Business and Investing Secrets of Warren Buffett”

The
content contained in this blog represents only the opinions of Mr.
Matthews.Mr. Matthews also acts as an
advisor and clients advised by Mr. Matthews may hold either long or short
positions in securities of various companies discussed in the blog based upon
Mr. Matthews’ recommendations.This
commentary in no way constitutes investment advice, and should never be relied
on in making an investment decision, ever.Also, this blog is not a solicitation of business by Mr. Matthews: all
inquiries will be ignored.And if you
think Mr. Matthews is kidding about that, he is not.The content herein is intended solely for the
entertainment of the reader, and the author.

Wednesday, February 26, 2014

When readers ask, “Is there a company out
there that’s got lower quality earnings than IBM?” the unfortunate answer is,
“How much time have you got?”

That’s because a majority of U.S. companies
report some form of “adjusted earnings,” not to mention some form of “adjusted
revenues,” and whatever they’re “adjusting” for, Wall Street’s Finest accept
them at face value.

Even Coca-Cola—Warren Buffett’s “perpetual” investment—has taken to reporting a revenue metric we’d never heard of before this earnings season: they call it “currency neutral, ex-structural revenue growth.”

(If, just for fun, a company started reported “Revenue Ex-Cat in the Hat,” we wouldn’t be surprised if more than a few of Wall
Street’s Finest dutifully reported “Revenue-Ex-Cat in the Hat” in their
so-called research reports.)

In any event, if conservative old
white-shoe folks from Atlanta can make up stuff with the best of
‘em—and the best of ‘em, of course, would be IBM—you can bet there are a whole lot
of companies that dream up all kinds of adjustments the number-crunchers on Wall Street crank into their
spreadsheets without a second thought.

Exhibit A today in this regard is Clean
Harbors, a broken (for the moment) “story” stock whose story has been that
smart management + pricey acquisitions – “earnings adjustments” = fancy multiple, despite the
fact that the acquisitions have proved less than stellar, and the perpetual
subtraction of “adjustments” from GAAP earnings has masked a deteriorating
business model that only recently (i.e. this morning) came unmasked.

The fact that CLH’s numbers stank is nothing
new: the company hasn’t “made the number” almost since the day its $1.25
billion purchase of Safety-Kleen closed the last month of 2012. But do not take our word for it: quarterly earnings “surprises” as compiled by Bloomberg (starting with the first Safety-Kleen quarter through today’s report) read as follows: -18%, +14%, -22%, -6%, -20%.

Of course, “earnings” for CLH, like so many
public companies today, is a construct of remarkable fluidity, excluding, just
for example, environmental liability accruals that recur like clockwork, and represent the fact that the environment remediation business of the company shells out a lot of cash to clean up after itself.

Whatever the construct, CLH’s new, “adjusted”
EBITDA target for 2014 is about $100 million lower than Wall Street’s Finest
were expecting just one year ago.

And that’s real money, not something the Cat
in the Hat dreamed up to keep the kids occupied.

Jeff Matthews

Author “Secrets in Plain
Sight: Business and Investing Secrets of Warren Buffett”

The
content contained in this blog represents only the opinions of Mr.
Matthews.Mr. Matthews also acts as an
advisor and clients advised by Mr. Matthews may hold either long or short
positions in securities of various companies discussed in the blog based upon
Mr. Matthews’ recommendations.This
commentary in no way constitutes investment advice, and should never be relied
on in making an investment decision, ever.Also, this blog is not a solicitation of business by Mr. Matthews: all
inquiries will be ignored.And if you
think Mr. Matthews is kidding about that, he is not.The content herein is intended solely for the
entertainment of the reader, and the author.

Wednesday, February 05, 2014

Good
day, ladies and gentlemen. Thank you for standing by. Welcome to Emerson's
investor conference call…. This conference is being recorded today, February 4,
2014. Emerson's commentary and responses to your questions may contain
forward-looking statements including the Company's outlook for the remainder of
the year. Information on factors that could cause actual results to vary
materially from those discussed today is available at Emerson's most recent
annual report on Form 10-K as filed with the SEC. I would now like to turn the
conference over to our host, Patrick Fitzgerald, Director of Investor Relations
at Emerson. Go ahead.

If you said, “Golly, it doesn’t include the
usual warnings about how the call ‘contains non-GAAP financial measures’,” then
you win.

Emerson, you see, doesn’t lead with non-GAAP
financials the way some companies do—and by “some companies” we’re thinking
especially about IBM, which uses non-GAAP financials the way a magician uses
his sleeves.

And Farr is true to his word: All the numbers Emerson’s team discusses
on its calls are strictly GAAP—that is, they conform to generally accepted
accounting principles.

In fact, in Emerson’s press release yesterday,
the term “non-GAAP” appeared just twice,
at the very end of the release with a table detailing a modest GAAP to non-GAAP reconciliation that would have boosted year over year earnings growth from 5%
to 8% had the company chosen to use it.

Emerson did not, however, choose to use it.

IBM, on the other hand, has no such
qualms.

The term “non-GAAP” appeared 39 times in IBM’s
most recent quarterly earnings release, starting in the very first sentence.

Such is IBM’s prowess at presenting the most
favorable numbers possible that, as we have seen in our previous look at the
number-massaging machine known as Big Blue, an 11% pre-tax income drop in the fourth quarter turned into
an 11% after-tax gain, thanks to the
magic of a near-non-existent 11.2% tax rate in this year’s quarter.

Now, you may wonder how Warren Buffett, who
routinely complains about the big-shots in America who pay a lower tax rate
than his secretary, feels about that.

We don’t.After all, Buffett also complains about the big-shots who don’t pay big
inheritance taxes on their wealth, yet Buffett will avoid the biggest inheritance
tax bill in American history by giving away his shares in Berkshire Hathaway ahead of time,
and rationalizes it thusly: he’s just following the rules.

Surely IBM is just following the rules.

But what rules, exactly, is IBM following?

Fortunately, Bloomberg has the answer, here,
in a story that broke yesterday around the time Emerson’s clean, all-GAAP earnings were
hitting the tape.

Seems IBM routes “almost all sales in Europe,
the Middle East, Africa, Asia and some of the Americas” through a Netherlands subsidiary,
IBM International Group BV, which counted 205,000 employees at the end of 2012,
“only 2% of whom actually work in the Netherlands.”

The Dutch Connection, according to Bloomberg,
helped IBM shave $1.8 billion of its expected tax provision in 2013—adding more
than 10% to the $16.5 billion in net income IBM reported.

And that, it appears, is how what might have
been a 10% decline in net income for the full year became a modest, easily
massaged 1% drop.

Which is why, as we’ve seen, unlike Emerson
Electric—which plays it straight down the middle—IBM prefers to focus Wall
Street on its non-GAAP, AGWICTMTQGP (“Anything-Goes-When-It-Comes-To-Making-The-Quarter-Accounting-Principles”)
number, where the weeds are deeper and the ball can be moved around without too many
people noticing.

The problem with non-GAAP, AGWICTMTQGP-based
earnings reports, as we pointed out many times when Hewlett-Packard was popular
with the beat-the-quarter crowd, is that it allows companies to include the
good stuff from, say, acquisitions (revenues and gross profits) while excluding
the bad stuff (intangibles and employee severance costs).

And as HP found out this week when it
years-too-late revised Autonomy’s 2010 revenues down by precisely 54%, the good
stuff isn’t necessarily as good as it appears to be at the time.

As for how all this bears on IBM’s
set-in-stone $20 EPS “Roadmap” for 2015, we have no opinion except that IBM
will make it.

There may be 39 uses of the phrase “non-GAAP”
in the press release announcing that $20 number, but they’ll make it.

How can we be so confident?Well, the recently-announced sale of the IBM
server business to Lenovo for starters.

Lenovo is paying IBM a couple billion for a
business that has a negative book value.So IBM will have, we are told by Wall Street’s Finest, a gain of $1
billion for the non-GAAP, AGWICTMTQGP cookie jar.

Even with the SEC investigating how IBM
reports its “cloud” revenue (disclosed last year)—IBM juices up its “cloud”
revenue by including hardware and IT services in the number—we would bet they make it.

In fact, we put the odds at, oh, 39 to 2.

Jeff Matthews

Author “Secrets in Plain
Sight: Business and Investing Secrets of Warren Buffett”

The
content contained in this blog represents only the opinions of Mr.
Matthews.Mr. Matthews also acts as an
advisor and clients advised by Mr. Matthews may hold either long or short
positions in securities of various companies discussed in the blog based upon
Mr. Matthews’ recommendations.This
commentary in no way constitutes investment advice, and should never be relied
on in making an investment decision, ever.Also, this blog is not a solicitation of business by Mr. Matthews: all
inquiries will be ignored.And if you
think Mr. Matthews is kidding about that, he is not.The content herein is intended solely for the
entertainment of the reader, and the author.